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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Fossil Group (NASDAQ:FOSL) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Fossil Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$57m ÷ (US$1.3b - US$429m) (Based on the trailing twelve months to October 2022).
Thus, Fossil Group has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 18%.
See our latest analysis for Fossil Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fossil Group's ROCE against it's prior returns. If you're interested in investigating Fossil Group's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
You'd find it hard not to be impressed with the ROCE trend at Fossil Group. The data shows that returns on capital have increased by 39% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Fossil Group appears to been achieving more with less, since the business is using 26% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Key Takeaway
From what we've seen above, Fossil Group has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 49% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing: We've identified 2 warning signs with Fossil Group (at least 1 which is a bit concerning) , and understanding them would certainly be useful.